Credit spread (underlying between long and short strikes)

drownpruf said:
Example #3 only relates to both options expiring ITM.

You will (need cash to maintain Reg T compliance) if the short is OTM and you do not cover the spread or sell the long prior to the close on LTD. The deeper call, if allowed to expire and assuming shares close between-strikes, will exercise automatically into long shares. FRB Reg T requires 50% margin to hold overnight at the open on Monday.

"If assigned you would just sell the stock" is incorrect. He's long the deeper call which would be automatically exercised (at exp). He would need to exercise (if assigned "early" on the short) the long call, or sell the call and buy shares. The only post-exp scenario he needs to worry about is auto-exercise of his long call if the short goes off OTM (series expires mid-strikes)
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I now understand what you are saying.
I misunderstood what you had said previously, sorry.
I do wish Elitetrader would allow editing.
 
What if you are assigned on the short put at the close on exp day,? What happens on the following Monday when you no longer are covered by a long put and you don't have the cash to buy 100 shares of the stock?
 
tferg11 said:
What if you are assigned on the short put at the close on exp day,? What happens on the following Monday when you no longer are covered by a long put and you don't have the cash to buy 100 shares of the stock?
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You wouldn't be out of the long put. I would not expect that you would sell the long and ride-out the short. Use common-sense. Your broker is not going to want you to be on call on Monday morning. Most will contact you to let you know if an expiring spread. Just dump the thing if you're at risk of shares come Monday morning.

In the end it's your account and risk. If you can't be in shares then cover the thing.

Both strikes ITM = let it go into exp (unless short is close to pin)

Long strike ITM, short OTM = cover spread

Both strikes OTM = your choice (but best to cover, even at a penny)
 
I usually run about 20 credit spreads into expiration.

Everyday at 3:30 I run through the list and graph out the underlyings and compare to the strikes. If there is any danger of my spread going ITM I will close out the spread. (or, rarely, I will roll it up, down or forward).

In addition if any of my spreads are close to going ITM, as expiration day approaches, my brokers (I use two) will start sending me emails (automated I am sure) notifying me of the situation and expecting me to fix it.

eg:
I just travelled to my family home for Easter Sunday where I made a ham and potato salad dinner for the family. I always carry a compact notebook computer onto the plane with me, and before I take off on a long leg of the journey I sit in the airport, use the free wifi to connect up, and go through my check list and review my emails just in case something has happened.

As a rule I always carry enough cash to cover the situation, but my brokers will send me the emails anyway.

eg:

I have been carrying a 77.5/80 bear call spread on BAX:

http://stockcharts.com/h-sc/ui?s=BAX

When there was news that BAX would split into two separate companies.

http://finance.yahoo.com/news/baxter-hits-52-week-high-132417658.html

it spiked BAX stock and brought my bear call spread into danger of going ITM.

Even though I have a ways to go before expiration and I have enough cash for any eventuality, I immediately began getting emails from my broker warning me of the situation.

It makes them nervous.
:D
 
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